Austria Central Bank Statement

Author: | Published: 5 Sep 2017

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The growth of the global economy accelerated noticeably
toward the end of 2016. The US economy is expected to gain
further momentum in 2017, driven by the expected fiscal policy
easing. Commodity-exporting countries are benefiting from
increasing commodity prices, and growth in China remains
strong. The euro area is in a cyclical upturn, backed by robust
consumption growth and improvements in the labour market. The
euro area industry is benefiting from improvements in world
trade and global manufacturing. Economic expansion continued
and broadened further across countries at the beginning of
2017. Business and consumer confidence improved significantly
in recent months, suggesting that activity will continue to
expand. Inflation in the euro area has been considerably below
the European Central Bank's (ECB) price stability definition
for a prolonged period. Over the course of 2016, inflation
increased, driven mainly by rising commodity prices. Core
inflation excluding food and energy has shown a continued
sideways movement at moderate levels just below 1%, posing a
continued challenge for monetary policy. In recent years, a
number of euro area countries have experienced a drop in house
prices. Meanwhile, the majority of euro area countries are in
an upturn phase of the housing cycle, although the strength of
the recovery is still relatively muted overall and rather
heterogeneous across countries.

Starting in 2012, the Austrian economy grew at a rate of
below 1% over a period of four years. In 2016, GDP growth
accelerated to 1.4%, mainly driven by a major income tax
reform. According to the June 2017 outlook of the
Oesterreichische Nationalbank (OeNB), the Austrian economy will
gain further momentum in 2017 and GDP growth will accelerate to
just over 2%. This cyclical upswing is broad based. Private
consumption continues to benefit from the tax reform that came
into effect in January 2016. Households have been spending only
parts of the income gains from the tax reform, much of the
additional income went into savings. These extra savings are
likely to boost consumption in 2017, but the impact will fade
out over time. Harmonised Index of Consumer Prices (HICP)
inflation has been increasing in recent months, reaching 2.2%
in March 2016. Inflation now exceeds negotiated wage growth.
The dampening impact of inflation on real incomes, and thus on
consumption, is likely to persist in the months ahead. At the
same time, the outlook for employment is very good, which will
continue to support private consumption.

The investment cycle peaked in 2016, mainly driven by
investment in vehicles. In 2017, the pace of expansion will
moderate only slightly as high capacity utilisation signals the
need for expansion investment. Global trade was very weak over
the past years but started to recover significantly toward the
end of 2016. Against this background, Austrian exports
accelerated considerably in the first quarter of 2017. Leading
indicators, like the OeNB's export indicator, as well as export
orders show a further increase in the months to come.

After 2017, the waning effects of the tax reform and a
cyclical slowdown of investment will dampen domestic demand
growth. Consequently, output growth is expected to slow down to
between 1.5% and 2% in 2018 and 2019, respectively. Over the
years 2017 to 2019, the cumulated growth performance of Austria
is expected to be very similar to that of the euro area.
Overall, the current outlook for the Austrian economy is very
favourable; the prolonged period of weak growth has finally
ended.